Amazon’s biggest profit ever is not big enough

How We Buy
How We Buy just strode into 2016 flexing some serious muscle.

Amazon’s sales jumped 22% during the fourth quarter, as $35.7 billion in quarterly revenue pushed the company’s annual sales past $100 billion for the first time ever.

Amazon’s performance capped a year in which brick-and-mortar retailers continued to struggle in a fast-changing landscape. People are increasingly turning to their gadgets for routine shopping and taking home delivery of items that once required a trip to the mall, with obvious implications for Jeff Bezos’ behemoth. While Amazon crowed about a successful holiday season, traditional department stores, including iconic brands such as Macy’s, were left in the cold.

The markets appreciate this simple story, up to a point. Amazon’s shares rose 119% in 2015, though before the release of today’s earnings report, the shares had dropped 6% so far this year.

But after the report was published things got ugly, as the stock tumbled by as much as 15% in after hours trading.

The takeaway? As Amazon’s stock rose last year, so did expectations for even faster growth. What’s more investors and analysts also seem to think Amazon is very close make the shift from relentlessly reinvesting earnings back into the business to generating sizable profits for shareholders.

“We believe [Amazon] has now reached a level of scale and efficiency where it can continue to invest aggressively in the business while also delivering material profits,” wrote JP Morgan analyst Doug Anmuth in a note earlier this week.

And to a point that’s true. Amazon’s profit more than doubled to $482 million in the fourth quarter, making the quarter its most profitable ever.

But, as the sharp selloff of the shares suggests, the market was expecting much more. In fact, consensus expectations called for something on the order of $730 million.

At any rate, this much is clear: When it comes to ruling the world of online shopping—at least in the US—Amazon’s founder, Jeff Bezos, is king. And his kingdom has lots of room to grow.

By the end of 2016, online retail sales will be roughly $414 billion, according to eMarketer, thats a scant 7.8% of all retail sales. In other words, that leaves somewhere in the neighborhood of $5 trillion in traditional retail sales in play.

Something tells us Bezos and Amazon will get more than their fair share of it. But if the reaction of the markets is any indication, Bezos might have to pass more of it along to shareholders in the form of profits rather than reinvesting into empire building.

Clarification: A previous version of this post reported that Amazon’s sales grew by 40%. That was versus the prior month. Year-over-year sales were up 22%.

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